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Monday, June 16, 2014

Why Twitter Will Outlive Facebook

A brief history of the Internet and a mildly amusing theory about software platforms versus protocols.

The Transatlantic Telegraph

On August 16, 1858, the first message was transmitted from North America to Europe via undersea cable. The message was sent using Morse Code.

That cable no longer exists. It's long been reclaimed by the sea.

But Morse Code is still used commercial and emergency applications to this day.

ARPANET, TCP/IP and TELNET

On October 29, 1969, the first message was transmitted from UCLA to Stanford over ARPANET, the first packet switching network. After a few iterations, TCP/IP was adopted as ARPANET's standard protocol in 1983. ARPANET became a subnet of the internet.

On February 28, 1990, ARPANET was taken offline.

However, TCP/IP is still the protocol stack the internet runs on to this day.

GUI Online Services, the Web and E-mail

The 1980s saw the rise of consumer pay online services. These included CompuServe, Prodigy, GEnie and AOL. These were initially walled-garden platforms, but by the early 90s, they had allowed for mass adoption of the larger Internet by allowing access to email and the web through easy to use graphical user interfaces. In 1989, CompuServe became the first walled-garden online service to offer incoming and outgoing email connectivity with the Internet at large.

Ultimately, AOL grew to become the world's largest walled-garden Internet community. Its stock soared going into 2000, when it bought Time Warner Inc. At the time of the merger, AOL had a market value of $162 billion.

By 2002, AOL had over 25 million paid subscribers worldwide, with access to standard email and web, in addition to its proprietary services.

By 2003, AOL's market-share was declining with the rise of free web-based email services coupled with affordable ISPs. In mid 2006, AOL began offering free email for non-subscribers to slow the rate of defection to other free email services such as Hotmail and Yahoo!

Today, AOL's walled-garden platform no longer exists.

Its current incarnation as a services, news and branding company has a market cap of about $3.7billion. Roughly, 2.5% of its peak capitalization.

There are still an estimated 2 billion email users worldwide.

Software Platforms Versus Protocols

In describing the difference between platforms and protocols, the most important word that comes to mind is "transcendence." When something is transcendent, it breaks out of confinement.

In this relationship, the Platform is the "confinement." The protocol is the "thing" that "breaks out."

This is the case illustrated by all of the above examples.

My argument is that Twitter is transcendent. It behaves like a protocol. It's a method of transport, and its inherent usefulness does not rely on the survival of its platform or any platform.

On the other hand, the fundamental value proposition of Facebook is only as good as its ability to keep uses on its platform.

This was the exact problem AOL faced at the turn of the century.

It's my opinion that Facebook is an identical product to AOL. In a way, it's a weaker product because Facebook does not solicit the inflation-adjusted $25/month that AOL used to get in the '90s. But as the web has become more robust, the ability to operate a platform equivalent to AOL through a browser instead of a stand-alone program has become reality. And that's precisely what Facebook is doing.

As the Internet evolves and we explore exceedingly unthinkable possibilities, Facebook's core business will still need to exist inside its platform or it ceases to be Facebook, as we know it. An analogy, aside from AOL, is Blackberry. As a platform, Blackberry is in critical condition. But their one hope is pivoting into the protocol business. A "transcendental" version of BBM, essentially a rich instant messaging protocol, will likely be their only business. If this sounds familiar, it's because it was one of AOL's post-platform pivots with AOL IM.

With Facebook, I'm not quite sure if they have a single component that has a life after platform.

The scary thing about all of this is irrational exuberance. It is uncanny how history has a tendency of repeating itself.

On January 10, 2010, AOL announced its intent to acquire Time Warner for about $182 billion in stock and debt. On that day, AOL was trading with a market cap of about $163 billion. It's significant to note that AOL had twice the market cap of Time Warner that day. It's significant to note that Time Warner was doing three times the revenue as AOL. It's significant to note that the deal left Steve Case more powerful than Ted Turner in the new company.

But through the lens of history, it's probably most important to note that today, Facebook is trading at a $144 billion market capitalization. That's edging on AOL's peak market cap. Facebook is booking about $6.87 billion in revenue, which is more than AOL's historic peak revenue. Finally, Facebook is pocketing about $1 billion a year, slightly more than AOL's peak net income.

Across the board, Facebook's current key statistics look so similar to those of AOL's at its peak, it's a little uncanny.

The cycle of market bubbles predates modern exchanges. The cycle of rapid adoption and abandonment of communications platforms predates the internet. Yet, irrational exuberance gets the best of us. We drive up financial markets. And so often, when the bubble bursts, it's platforms like AOL and Blackberry leading the dive.

I'm of the opinion that Facebook will find itself in a similar position. And it too will lead the dive of its sector. This cycle appears to be an inherent aspect of communications technology. I don't think this indicates something wrong with the businesses that live this cycle.

Rather, there seems to be something about society and how we interact with each other through technology that drives this cycle.

I believe that while ubiquity requires a critical mass, abandonment also requires a critical mass.

An important aspect of new communication forms will always be novelty and exclusivity.

Novelty and exclusivity make new communication technology an attractive alternative to real life. These are two things that are always defined by the platform. Not the protocol. And as novelty and exclusivity wain, the platform loses unique value.

But the protocol, the transport technology that powers it, can live on.